It is a tenet of American economic beliefs, and an article of faith for Republicans that is seldom contested by Democrats: If taxes are raised on the rich, job creation will stop.

Trouble is, sometimes the things that we know to be true are dead wrong. For the larger part of human history, for example, people were sure that the sun circles the Earth and that we are at the center of the universe. It doesn’t, and we aren’t. The conventional wisdom that the rich and businesses are our nation’s “job creators” is every bit as false.

I’m a very rich person. As an entrepreneur and venture capitalist, I’ve started or helped get off the ground dozens of companies in industries including manufacturing, retail, medical services, the Internet and software. I founded the Internet media company aQuantive Inc., which was acquired by Microsoft Corp. (MSFT) in 2007 for $6.4 billion. I was also the first non-family investor in Amazon.com Inc. (AMZN)

Even so, I’ve never been a “job creator.” I can start a business based on a great idea, and initially hire dozens or hundreds of people. But if no one can afford to buy what I have to sell, my business will soon fail and all those jobs will evaporate.

That’s why I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.

Theory of Evolution

When businesspeople take credit for creating jobs, it is like squirrels taking credit for creating evolution. In fact, it’s the other way around.

It is unquestionably true that without entrepreneurs and investors, you can’t have a dynamic and growing capitalist economy. But it’s equally true that without consumers, you can’t have entrepreneurs and investors. And the more we have happy customers with lots of disposable income, the better our businesses will do.

That’s why our current policies are so upside down. When the American middle class defends a tax system in which the lion’s share of benefits accrues to the richest, all in the name of job creation, all that happens is that the rich get richer.

And that’s what has been happening in the U.S. for the last 30 years.

Since 1980, the share of the nation’s income for fat cats like me in the top 0.1 percent has increased a shocking 400 percent, while the share for the bottom 50 percent of Americans has declined 33 percent. At the same time, effective tax rates on the superwealthy fell to 16.6 percent in 2007, from 42 percent at the peak of U.S. productivity in the early 1960s, and about 30 percent during the expansion of the 1990s. In my case, that means that this year, I paid an 11 percent rate on an eight-figure income.

One reason this policy is so wrong-headed is that there can never be enough superrich Americans to power a great economy. The annual earnings of people like me are hundreds, if not thousands, of times greater than those of the average American, but we don’t buy hundreds or thousands of times more stuff. My family owns three cars, not 3,000. I buy a few pairs of pants and a few shirts a year, just like most American men. Like everyone else, I go out to eat with friends and family only occasionally.

It’s true that we do spend a lot more than the average family. Yet the one truly expensive line item in our budget is our airplane (which, by the way, was manufactured in France byDassault Aviation SA (AM)), and those annual costs are mostly for fuel (from the Middle East). It’s just crazy to believe that any of this is more beneficial to our economy than hiring more teachers or police officers or investing in our infrastructure.

More Shoppers Needed

I can’t buy enough of anything to make up for the fact that millions of unemployed and underemployed Americans can’t buy any new clothes or enjoy any meals out. Or to make up for the decreasing consumption of the tens of millions of middle-class families that are barely squeaking by, buried by spiraling costs and trapped by stagnant or declining wages.

If the average American family still got the same share of income they earned in 1980, they would have an astounding $13,000 more in their pockets a year. It’s worth pausing to consider what our economy would be like today if middle-class consumers had that additional income to spend.

It is mathematically impossible to invest enough in our economy and our country to sustain the middle class (our customers) without taxing the top 1 percent at reasonable levels again. Shifting the burden from the 99 percent to the 1 percent is the surest and best way to get our consumer-based economy rolling again.

Significant tax increases on the about $1.5 trillion in collective income of those of us in the top 1 percent could create hundreds of billions of dollars to invest in our economy, rather than letting it pile up in a few bank accounts like a huge clot in our nation’s economic circulatory system.

Consider, for example, that a puny 3 percent surtax on incomes above $1 million would be enough to maintain and expand the current payroll tax cut beyond December, preventing a $1,000 increase on the average worker’s taxes at the worst possible time for the economy. With a few more pennies on the dollar, we could invest in rebuilding schools and infrastructure. And even if we imposed a millionaires’ surtax and rolled back the Bush-era tax cuts for those at the top, the taxes on the richest Americans would still be historically low, and their incomes would still be astronomically high.

We’ve had it backward for the last 30 years. Rich businesspeople like me don’t create jobs. Middle-class consumers do, and when they thrive, U.S. businesses grow and profit. That’s why taxing the rich to pay for investments that benefit all is a great deal for both the middle class and the rich.

So let’s give a break to the true job creators. Let’s tax the rich like we once did and use that money to spur growth by putting purchasing power back in the hands of the middle class. And let’s remember that capitalists without customers are out of business.

(Nick Hanauer is a founder of Second Avenue Partners, a venture capital company in Seattle specializing in early state startups and emerging technology. He has helped launch more than 20 companies, including aQuantive Inc. and Amazon.com, and is the co-author of two books, “The True Patriot” and “The Gardens of Democracy.” The opinions expressed are his own.)

To contact the writer of this article: Nick Hanauer at Nick@secondave.com.

To contact the editor responsible for this article: Max Berley at mberley@bloomberg.net

There you go, I'm sure who I will see in this chat. This is from the 1% and just adds to OWS success. So in this thread I would say that yes OWS has opened the door for conversation and the right path forward, even though others on this site would have you believe other wise. So while others want to protect the rich's tax rate or maybe even brown nose them enough to get some money to trickle down. It's demand that creates jobs, not tax cuts for the upper, upper 1% or .01%. You can say what ever you want but this type of tax code has never worked or never will unless you have slaves doing free work. O wait maybe thats the point.

The one thing the United State certainly does not need is more shoppers ... The United States needs fewer people who are going into debt to buy stuff they don't need, and they need far more people who are producing the products and services that are needed throughout the rest of the world by developed and developing nations alike.

The fact that the "expert" doesn't understand this makes me question anything else he has to say

America got on perfectly fine from 1776-1913 without any income tax at all (except during wars when they were temporarily introduced and then repealed). I don't get why people think more taxes are the answer to everything.

How about we stop trying to make everyone equal, and let everyone be free to do what they will with their money.

So if I own a store which gets more costumers, which inturn I make more money. The companies products that I sell earn more money  and then inturn creates more jobs, which inturn makes more tax's to pay off our debt.  WHAT ARE YOU TALKING ABOUT??? you and your buddy are lost.

This guy only paid 11% in tax's while making a sh-t load of money. When it comes down to who knows more, you or this guy, I'm going to go with the person who is giving up his money for the truth and you just are riding the republican myths. 

You talk about developing nations needing products but you just contradicted your self. So you need people around the world to buy the products, DEMAND creates jobs.

Yet if there where more money paid by the upper 1%, there would be money to put into things like highspeed rail or better internet, which USA is far behind. SO infrustructure which pays people well and then inturn creats millions of jobs along the way. Then inturn drives up pay rate because there will be competition for workers. 

So the shoppers you are so sure are spending money that they don't have, well actually have the money because of a good economy. This seems to what you don't want though. You want a broke class that has to use money that don't have to eat. WHat a bad thing. This is from the 1%, not some random guy that always push's republican talking points, like he's getting a check from the koch brothers himself.

The fact that you can't understand this is reason enough for me to never listen or read your comments again.

The tax rates are fine, just close the loopholes.

Massively increasing taxes on the rich will just transfer the wealth (to other countries) as there are so many current tax loopholes.

Meaning it will not do much...


Also increasing taxes on the rich will not solve the budget problem single handily and anyone who thinks that should stop drinking the kool aid served by Barrack Obama.

The government needs way more money now than it did 100 years ago. Between a superpower military, helping the sick, mantaining infrastructure, and investing in the 1%'s companies, they need all the cash they can get.

Wow, that was a rather incoherent paragraph ...

If your customers are paying for the goods and services you provide through debt financing and imaginary "equity" (see home equity lines of credit) any economic activity represented by the sale of these goods and services will be eliminated when people actually have to pay down their debts; and the interest they will be paying on these debts will reduce the overall economic output of the economy.

For decades the economy of the western world has been propped up by debt driven consumerism and government excesses which has pushed the economy to the brink; the last thing we need is further debt driven consumerism and government excesses to push us off the edge.

As a venture capitalist he invests in small companies that are far too risky for the average investor or bank, most of these companies bleed money until they eventually go bankrupt and the venture capitalists lose all of their invested money, and the only reason any of these investors are willing to take on these risks is because the massive potential reward easily compensates for the losses.

At the same time the vast majority of jobs created for the past few decades has been the result of the rapid growth of entrepreneurial start-ups that were backed by these venture capitalists.

If he is such a good venture capitalist that he is highly successful at selecting the companies that will thrive then having him keep his money is the most efficient way to ensure that capital finds its way to the entrepreneurial start-ups that will create the jobs of the future.

I don't think you understand what I was talking about ... It is not a contradiction to say that Americans should stop engaging in mindless debt-driven consumerism and should focus on producing (preferably productivity increasing) goods and services for the rest of the world.

Keep believing that ...

The government spends money in an inefficient and corrupt way that benefits the political connected. Much like the billions of dollars spent on green projects that have only resulted in massive profits for large, well connected businesses and increases in the cost of living to the average citizens in countries around the world, more money in the hands of the government to pay for politicians' pet projects will only be wasted on detrimental projects.

On top of this, much like everwhere else it has been tried, increasing revenue will do nothing to reduce the deficit level because the money will be spent faster than it is comming in ...

So, in the dozens of times Keynesian economics has been tried and failed because shifting money from the efficient private sector to the inefficient public sector only does more harm than good should be ignored because you're greedy and unwilling to work for the money yourself?

As a percentage of the economy, why would they need more money?

While you need to spend more money on infrastructure and the military the increase in productivity has resulted in massive increases in GDP should more than compensate for these increased needs.

Beyond that, in every measureable way the poor have been far worse off because of the war on poverty that was started in the 1960s and everyone should question whether the government should really be in the charity business; especially being how much more efficient and effective charities are.

While i support his point, i do find it odd that, as HappySquirrel pointed out, he is not discussing that most of that excess money doesn't sit around, but is shunted into things, especially in the case of a venture capitalist

Unless he is referring strictly to income and not to capital gains, the former of which is more likely to sit around than the latter

He is ultimately correct in that consumers need to be re-primed to spend, but primed by systems other than easy credit... Either that or we need to focus on feeding (economically, not literally) the growth of the developing world